Supreme Court rules on NCLT's powers under IBC

Supreme Court rules on NCLT's powers under IBC

The tribunal had disregarded the contention of the defaulting firm and allowed the corporate creditor to recover the dues

The Supreme Court has held that the National Company Law Tribunal (NCLT) cannot exercise the discretionary powers to order the initiation of insolvency proceedings "arbitrarily or capriciously". It must first consider the grounds made by the corporate debtor against it.

The bench comprising Justice Indira Banerjee and Justice J K Maheswari said that if the corporate debtor opposed the initiation of the insolvency proceedings saying it has a money award in its favor and the awarded amount exceeds the debt, then NCLT "would have to exercise its discretion under the Insolvency and Bankruptcy Code (IBC) to keep the admission of the application of the financial creditor in abeyance".

In its 34-page judgment, the bench set aside the verdicts of NCLT and the National Company Law Appellate Tribunal (NCLAT). It refused to stay the insolvency proceedings initiated by the corporate creditor Axis Bank Limited against Maharashtra's defaulting firm Vidarbha Industries Power Limited (VIPL).

The apex court said that VIPL, a power-producing firm, opposed the insolvency proceedings on the grounds that included it had won a case in the Appellate Tribunal for Electricity (APTEL). It challenged the disallowance of the actual fuel cost for the financial years 2014-2015 and 2015-2016.

In November 2016, APTEL allowed VIPL's appeal and directed Maharashtra Electricity Regulatory Commission (MERC) to allow the firm the actual cost of coal purchased and the amount of Rs.1,730 crores due to it in terms of the order. (The appeal against the APTEL order was still pending in the top court).

The NCLT disregarded the contention of the defaulting firm and allowed Axis Bank's plea to initiate the insolvency proceedings to recover approximately Rs.553 crores dues.

The bench stated, "NCLT has simply brushed aside the case of the appellant that an amount of Rs.1,730 crores was realizable by the appellant in terms of the order passed by APTEL in favor of the appellant. It was done with the cursory observation that disputes between the appellant and the recipient of electricity or between the appellant and the Electricity Regulatory Commission were inconsequential."

"Both NCLT AND NCLAT fell in error in holding that once it was found that a debt existed and a corporate debtor was in default in payment of the debt, there would be no option left to NCLT but to admit the petition under IBC," the bench added.

It said that NCLT must consider the grounds made out by the corporate debtor against admission on its own merits.

The court explained, "For example, when admission is opposed on the ground of existence of an award or a decree in favor of the corporate debtor, and the awarded/decretal amount exceeds the amount of the debt, the adjudicating authority would have to exercise its discretion under IBC to keep the admission of the application of the financial creditor in abeyance unless there is a good reason not to do so."

It agreed with the contention of VIPL that it had applied for a stay of the proceedings before NCLT, Mumbai, under extraordinary circumstances. It had not been able to pay the dues to Axis Bank only because MERC's appeal against APTEL's order was pending in the apex court.